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How Negative Equity Improves Home Values: Reports

July 17, 2012

How Negative Equity Improves Home Values: Reports

Home prices are increasing, but one of the main drivers behind the boost in home values is also weighing on supply and demand.

According to a report from CoreLogic, negative equity is helping to drive up home prices because it also keeps homeowners from listing their property, which keeps inventory low.

Of the largest 100 markets, the five markets where prices are accelerating the fastest also have the highest share of negative equity and high demand for distressed properties.

Examples CoreLogic provided were Phoenix and Miami, where prices in May over a 12-month period appreciated by 14.7 percent and 9.7 percent, respectively.

In a recent report, Capital Economics also addressed the impact of negative equity on home values, and said that in a handful of hard-hit states, homeowner vacancy rates are well below the average, an indication of low supply.

“Presumably that’s because investment demand for cheaper homes – which are more likely to be afflicted by negative equity, and therefore in relatively short supply – is particularly
strong in States where housing valuations are especially low,” wrote Paul Diggle, property economist for Capital Economics.

CoreLogic also noted that homes in the lower-price segment are appreciating more rapidly. Over a one-year period, homes priced 125 percent or more above the national median improved by 1.8 percent compared to a 5.7 percent increase for homes priced below 75 percent of the national median.

This improvement in lower-priced homes, CoreLogic explained, is also helping to reduce the share of negative equity since underwater homes tend to be concentrated in lower-priced segments. Thus, as lower-priced underwater homes start to show price gains, they move out of negative equity. CoreLogic’s most recent report on negative equity revealed that 700,000 homes found their way out of being underwater in the first quarter of this year due to price improvements.

While negative equity does harm the housing market, Diggle said the net effect of negative equity on the homes prices is “fairly muted.”

“The bottom line is that negative equity will continue to weigh heavily on housing market activity, both on the supply side and the demand side. Nevertheless, it isn’t preventing a modest housing market recovery from taking shape,” Capital Economics concluded.

via How Negative Equity Improves Home Values: Reports.

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